Realty Forum 2023: The office market is constantly evolving and adapting to ESG standards

The highly anticipated Realty Forum 2023, organized by Business Review, became a captivating convergence of industry leaders and esteemed experts. The first panel of the event gathered the market experts to talk about Office Trends to Look for in 2023. And the most important trend today is sustainability and how to integrate ESG standards in office buildings, in order to improve the quality of the working environment. 

Andreea Cotiga: The office market is witnessing quite extensive changes

”The office market is constantly evolving in recent years, because the paradigm is also changing, and I have said on other occasions, this health crisis that we went through three years ago only accelerated the change, acted as a catalyst. It was not an easy path, and it is not now; we face challenges every day, but what is important is that we have always managed to find solutions and adapt quickly,” said Andreea Cotiga, Head of Leasing Office at CPI Property Group Romania.

Beyond the macroeconomic aspects, which affect us all equally, i.e. inflation, higher financing costs, high costs of building materials, the office sector has felt a very big impact in the context of the hybrid way of working, which is no longer a novelty, but becomes a custom of companies.

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The certain peculiarity comes from the weight that companies give to remote work, a weight that also depends on the activity sector. But at the end of the day these are all elements that companies take into account when determining their office space footprint.

In this context, the office market is witnessing quite extensive changes and I believe that there are opportunities coming from other fields of activity, both in the private and public sectors, and not necessarily from the IT&C area that was the star offices since we know each other. The demand coming from other areas will become able to absorb from the existing stock of offices and thus generate a contraction of the stock of unleased spaces, especially in the conditions of a limited supply of new office spaces. And in the coming years the situation will remain the same.

We saw an opportunity in approaching new fields of activity and set a trend by signing long-term contracts with two medical service operators. The first was Provita, which rented a MyHive building where it will launch a multidisciplinary hospital this year, and the second was Leventer, which will launch the country’s first dermato-oncology hospital in MyHive Victoria Park. We are also satisfied with the leasing activity, we are always close to our tenants and actively contribute to the reorganization of office spaces to make them more welcoming and familiar. The degree of physical presence in the office has started to increase, now it is somewhere around 70%.”

Andrei Boca: There is an opportunity for companies to access space in premium locations and buildings

”The first half of the year was abundant for us, we rented over 110,000 square meters, and new leases, but also extension contracts with tenants. As the panelists also pointed out, there is an opportunity for companies to access space in premium locations and buildings,” said Andrei Boca, Senior Leasing Manager la Globalworth Romania.

”And we saw companies coming from an area without public transportation, from an old building, and I’m coming to an area with a lot of amenities, very important things for any project. And when we build, everything matters. The ground floor, for example, represents very little in terms of revenue, and then we look to put someone there who adds value to the people in the buildings. This was reflected in all our buildings, including those in Pipera, and those in Barbu Văcărescu and Calea Floreasca.

The tenants’ decisions obviously include location, accessibility, and we as market professionals adapt to all market changes because, if we talk about the crowding in certain office areas, until a few years ago we could not offer the residential alternative in those areas, on when now the residential areas have grown, especially on Pipera road. Thus, there is no need to come from the other end of the city and have a very long commute.

Strictly related to the decision to choose certain buildings, we have all kinds of buzz-words in our industry, such as ESG now. This time it is no longer a question of a company that certifies something, but of certain regulated standards that we must all respect, so it will be much easier to compare. Coupled with carbon footprint reporting. We will really see if we manage to do what we promise. In Globalworth we also have the workplaces department, with which we make almost 60,000 meters of fitout out of the 110,000 square meters rented. Our colleagues make sure that what we promised on the commercial side actually happens on the ground.”

Mihai Paduroiu: The health crisis and especially inflation had a rather large impact on the office rents

”Rising rents in the office market is a topic that has not been fully debated. The office market in Bucharest and in the big cities is the most free of price fluctuations in the entire real estate spectrum,” said Mihai Paduroiu, CEO Office Division at One United Properties.

”From 2010 to last year, rents have been more or less the same without any major fluctuation, which denotes very strong stability and a very fine balance between supply and demand. The health crisis and especially inflation had a rather large impact on the entire economy and this was also translated into the increase of office rents.

It is very important to understand this phenomenon and to understand that an office building, especially a new building, has some costs composed of the construction part, those of the land, but also costs from bank financing, which in turn was influenced by the events of the last three years. All these elements have driven rents up, and we need to understand exactly what we are getting when we rent office space, because there are huge differences between buildings, including new buildings. And then, our recommendation is that a rental decision is not made in Excell, but after a thorough analysis of all parameters, from technical specifications to operating costs, utility costs and only then the rent per square meter. All other costs, fit-out, service charge, utilities, can vary more and have a very important subsequent effect.

Obviously, the dynamism of the companies’ footprint also has positive effects, in the sense that companies that in the past did not have access to class A or ultra-prime offices, in very new buildings with excellent specifications and very good locations, through the hybrid way of working, today have access at these offices. And they can give people the opportunity to work in a special environment designed to generate performance.”

Valeriu Toma: ESG puts a beneficial pressure on all the players in the market

”It’s clear that things revolve around ESG these days and we are very happy about this emergence of ESG standards. What I think ESG has brought and what is the impact on premium buildings is that it has unequivocally removed silo mentality,” said Valeriu Toma, Head of Property Management at CBRE Romania.

”Because it was always a debate about what the level of technological equipment of the building is, how much the developer should invest in the building, because that involves a number of costs, how much the tenant is willing to pay for this kind of facilities. Now, ESG puts a beneficial pressure on all the players in the market, whether tenants, developers or owners, and it also helps us in the administration area, because all buildings are starting to be equipped to meet the requirements of today, but also to those of tomorrow.

It is an absolutely natural step to invest to align with the European standards that are now upon us and which if we study carefully we see that they are things of absolute common sense and put the community and the man who works in the building first. It is a necessary and mandatory step, and no developer can afford not to comply with these requirements. It is important to have a space that serves the person who works there, not a building erected on empty land for commercial reasons and that’s it.”

Jan Demeyere: The era of free money is gone and it will not be back very soon

”I think we have to be honest: the party is over. The era of free money is gone and it will not be back very soon. So we have to be careful. The financing put another concern on our business,” said Jan Demeyere, Co-Founder & Partner at Speedwell.

”Bank financing is very difficult, we talk about ESG, about prices, we have to give a very high standard from a sustainability point of view. So, we have to be very careful in our activity today.

For sure, including ESG standards will increase the prices. But I don’t think that any self-respecting developer today would dare to construct a building that is not sustainable. Even the banks also ask for sustainability; you have to have green loans, not normal loans anymore. So these are all such effects that put another cost on buildings. And when we talk about prices and we see that they are quite stable, but many developers are offering many things for free, like fitout costs, contributions.

The office market is under a lot of pressure. And we are in very murky water because we, as developers, have an idea on how to make an office building better, but also our tenants do not know how the future will be. We used to see big spaces, four, six or eight thousand meters, but this is not on the market anymore. Today they will take 500 or 600 meters and then they will see what happens. And the buffer is out, because people can work from home, which is completely reasonable, especially in Bucharest, where it takes two hours to get to the office, so will lose a lot of time in which it can be productive. What we believe is in the next project, which covers not only office spaces, but also part residential, part services. For someone who lives there it would take ten minutes to get to the office.

I think we as developers can create quality buildings, where people can have a community, where people work as a team. You cannot look at the office as a single element, separated from residential. All the services are needed to work in a fluid way. And even if today the demand is low, prices will not go down because you build at a certain cost, you build quality at a certain cost, and it has to be paid in the end. I think that if you put quality in your building, the future will be bright.”

Antoniu Panait: Green buildings have not been a novelty for several years

”First of all, we have to understand that offices are not going to disappear. We are not going to lock ourselves in caves, we are not going to isolate ourselves in forests. Offices evolve rapidly, as does technology,” said Antoniu Panait, Managing Director at VASTINT Romania.

”I always tell our clients that we create the framework in which they will further develop the concept and what they want for their employees. We lay the foundation. Green buildings have not been a novelty for several years. Today we look at ESG, which gathers under one umbrella a lot of things that have been addressed over time. A recent study showed that around 65% of office buildings in Europe are not up to date and if they are not modernized by the end of this decade, they will be out of date, out of date.

I mean the glass-fronted buildings; in the conditions of the heat outside, in Bucharest, there are buildings that cannot cope, the cooling equipment cannot cope because of the inefficient glass facade. This is not supposed to work anymore. How soon we will be audited as a Group from an ESG point of view and this element of the buildings will also be taken into account. And the tenant must be prepared, do a due-diligence, check the buildings before renting, because it is very important where people will work, what fresh air intake the building has.

As office buildings evolve, so do companies. During periods of economic growth, many companies hire on the conveyor belt, take more office space than they need. Now things are settling down. In our portfolio we have extended contracts with most clients. Some have downsized, but continue to operate very well, and the spaces they vacated were immediately rented. It takes longer because there are tenants who hesitate, they don’t know what to do.

But the ESG part, of green buildings, is already important to tenants. And we will see more changes from this point of view, because you cannot have, for example, a Big4 audit company that does not have its offices in a green building. We currently have two projects in Bucharest, one building is fully completed, Business Garden Bucharest, and the other is Timpuri Noi Square. Thanks to the new internal standards, we have both current buildings, with heights of three meters, full intake of fresh air.”

Mark Thompson: It is really interesting that sustainability is such a big part of the office space now

”Romanian market was very difficult for us. Our business was adapted for Australia region and even if we have similar spaces in Romania we had to do quite a bit of pinching and pulling for our business model to make it fit to Romania market,” said Mark Thompson, Managing Director at EcoClean FM Romania.

”I think it is really interesting that sustainability is such a big part of the office space now. Offices are not just plain office spaces anymore, the ecosystem that people can get involved in and developers and investors look at those eco-spaces as well. Soft services, that is what EcoClean provides, is an interesting fit for those spaces. It takes quite a lot of work to make those services fit the developers and the representatives of those companies and buildings requirements.

For us, in Romania there are a lot of fragmented spaces that was difficult to understand initially how single buildings with fragmented floors. In other parts of Asia, where we operate, there is a single entity that controls the entire software services. You have a single service provider for the entire space. That doesn’t happen here and that was a difficult thing for us to adapt to. We have changed our business model quite substantially to fit the Romanian market. I think that now we have a great fit for the market here, we understand in more depth what is required for soft services, not only cleaning services, but also gardening and things like this.

But it was very difficult initially. We took our framework, we changed it, we put in paces, we marketed and talked to our friends and asked what it fits best and we came back with what we think is a really good fit. And so far we got quite a lot of traction.

The office space is definitely something for the future and not only for the office, but for other purposes as well. And you must have the specialized service for each of them.”